The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.

HEROES Act Dependent Expansions Come with Major Drawbacks

May 19, 2020

Taylor LaJoie

Taylor LaJoie

In a previous post, I outlined portions of the dependent-related provisions in the recently-passed HEROES Act (H.R. 6800), focusing on changes to the EITC, CTC, and CDTC. Although the legislation increases and expands each of the credits, the changes are untimely, intentionally temporary, and lack sufficient stability, simplicity, and transparency.

Timing

The HEROES Act enters the coronavirus response debate as policymakers evaluate whether and what the fourth iteration (“Phase 4”) of economic relief should be. While it is true that a large portion of tax relief to lower-income filers is provided through the EITC and in part the CTC, it remains ill-advised to tinker with these credits at this time.

Rather than approaching these credits with a long-term policy vision in mind, House Democrats are using dependent-related provisions to boost after-tax income regardless of whether these credits are the best means of accomplishing that end. Phase 4 should focus on a) combating the virus; b) helping businesses retain workers already employed; and c) building a transition for the economy to recover after the virus has been contained. Phase 4 is not the place to forgo hundreds of billions of dollars in revenue in order to experiment with credit parameters for a single year.

On advanced CTC payments, intuition suggests that getting money in the pockets of tax filers sooner will be better for the individual and the economy as a whole. However, experience with the EITC suggests that the ideal and the reality do not always meet when the time to implement the policy arrives.

Because the CTC has a more straightforward eligibility parameter structure than the EITC, it is less likely to result in incorrect payments or abused by fraudulent filers. Even so, HEROES changes the eligibility criterion for CTC recipients for 2020 by creating a new young tax credit, increasing the nominal credit amount by $1,000, and making the entire credit refundable. While advanced payments would no doubt be more generous and welcome (all else being equal), there are better ways of providing temporary relief separate from changing the parameters of these credits. If policymakers wish to change the credits, a permanent alteration would be the better route.

Stability

Temporary changes to the tax code affect a taxpayer’s economic decision-making and alter incentives. More complicated provisions increase compliance and reduce productivity. Supplementing and expanding the benefit for dependents, expenses, and work encourages filers to claim these credits in the year they become more valuable.

To reduce incentive distortions and compliance burdens, any change to the CTC, EITC, and CDCTC should be permanent so that taxpayers can qualify for the changes this year and every year after without having to reset to a new benefit schedule. Imagine a taxpayer who reaps large financial benefits from HEROES in 2020, but then finds a smaller benefit and more complicated filing requirements in 2021. While the former is certainly appreciated, not pursuing permanence means that the federal government loses revenue while the taxpayer remains confused and beset by ever-changing standards, to say nothing of government administration and correcting fraudulent claims.

Simplicity

Tax changes should be easy to understand and administratively feasible. While increasing these benefits is no doubt welcome by the recipients, filers who are used to calculating expenses, dependents, and work hours for the last two years will have a different system in 2020 under HEROES. This means that those who can sufficiently track the changes and file the correct information will receive a large windfall while those with little understanding or access will find themselves unaided without pursuing the right steps.

Each of the credits discussed above are well-intentioned and designed with a specific objective. However, multiplying the layers of complexity and changing refundability will only add to the issues already found in the debate over these credits.

Transparency

As I highlighted in a recent post, the U.S. Treasury Department continues to find evidence that a large percentage of payments (approximately 25 percent) under the EITC have been incorrectly disbursed to filers, for multiple years, due to improper information and IRS oversight capability. While increasing the childless EITC has support from a wide range of academics, scholars, and policymakers, removing the Social Security Number (SSN) requirement invites a future where there is less transparency in the program and likely more payments disbursed incorrectly. Any future expansion of these credits should include more oversight so that taxpayers can be assured their money is being spent wisely and the correct beneficiaries are receiving the proper refund amount.

Conclusion

Despite the increased financial benefit certain filers would see if the legislation were enacted and ratified, the bill also adds to the confusion and instability already inherent in a code with multiple expiring provisions and reduced filing guidelines. While the bill is certainly more generous and would likely increase after-tax income for many filers, it fails to properly address multiple concerns which will, in turn, create more problems for policymakers and tax filers in future years.

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The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.